Hiroshi Morita says business is better than it has been for 10 years -- but in Japan, that's not saying much. In the office above his factory in Ota City, on the outskirts of Tokyo, where the thump of huge metal-stamping machines reverberates through the floor, he says orders have finally picked up, and he has managed to avoid cutting the wages of his 37 staff.
His company, Morino Indus-tries, makes metal frames -- these days for flat-screen TVs -- and his customers are the giants of Japan-ese electronics.
Morita's story, of laying off workers, cutting the wages of those who remained, and still fighting to find a competitive edge, has been repeated all over Japan since the frenzy of the 1980s boom years gave way to a 10-year slump. It has become known as Japan's lost decade: while China and other developing countries were surging forward, Japan stood still. Growth for the 10 years from 1992 averaged barely 1 percent, as prices and wages spiralled downwards.
Now, just as a new optimism about the future has begun to creep into homes and businesses, the dollar selling spree, which has shaken financial markets since US President George W. Bush's re-election, is threatening to derail Japan's best hope of a genuine recovery for many years.
Over the last two months, the yen has appreciated by more than 9 percent against the dollar; and since China pegs its currency, the yuan, to the greenback, Japan's exports are becoming more expensive in its two major markets.
Prime Minister Junichiro Koizumi made his feelings clear at a press conference last week: "I don't welcome a rapid fall in the dollar and I don't think it is desirable."
Inside the Ministry of Finance, the anxiety -- and the irritation -- about America's apparent willingness to sit back and watch the dollar tumble is obvious. A senior official criticizes Federal Reserve chairman Alan Greenspan's "misjudgment," in standing up on Nov. 19 when the sell-off was already well underway and declaring that the vast US current account deficit, the main catalyst for the dollar's decline, was becoming "increasingly untenable."
"Such remarks are not welcomed by other countries," the Ministry of Finance official said.
Japan has made clear its desire for a campaign of joint intervention with the European Central Bank to prop up the greenback. In the spring, the ministry spent billions of dollars capping an earlier surge in the yen; but it hasn't intervened since March.
Its less activist approach this time probably reflects the mood of cautious optimism among analysts and executives about Japan's ability to withstand a yen appreciation.
"Japan is our home market, and we expect much growth in the Japanese market," says Katsuhiko Machida, president of Sharp, who spells out the firm's strategy of developing "one-of-a-kind" products to compete with lower-cost econo-mies such as China.
A display of sleek flat-screen LCD TVs shows where the firm thinks the future lies, and Machida says Sharp's "black box" manufacturing process is aimed at safeguarding the secrets of its technology. This constant effort to secure competitiveness by finding a new technological niche has been characteristic of the radical restructuring many firms have undertaken since the long downturn began.
Graham Turner, of GFC Econo-mics, points to Organization of Economic Cooperation and Development data showing that Japan was the only G7 country to increase its share of global exports over the last three years.
"Exhorted by a more active shareholder base to cut costs and meet the challenge posed by an ultra-competitive China on its door-step, Japan's corporate sector has launched a decisive drive to lower its break-even point," he said.
"Japanese manufacturing is almost like a research laboratory now," said Yoshinobu Ishikawa, the governor of Shizuoka prefecture, southwest of Tokyo.
He is offering loans and advice to small firms with innovative business projects, and hopes to bolster existing clusters of busi-nesses in the area. He describes the local economy as a "department store" of different industries.
Shozo Kasuya, president of Star Micronics, a successful Shizuoka-based firm making intricate watch parts and machine tools, says Japanese companies have been effective at hanging on to high-tech production technology, preventing the "hollowing out" that has swept much of British manufacturing industry overseas.
These slimmed-down, tech-rich businesses, many of which have also cut costs by manufacturing some of their less high-tech products in China, should help the economy to survive the onslaught from a cheaper dollar.
And there are other reasons for hope. The Bank of Japan, which has flooded the financial system with cash to help reflate the economy, has promised to underwrite recing zero interest rate policy until there is sustained positive inflation. It recently predicted that prices would begin to rise next year.
Koizumi's government has also taken action to deal with the problem of so-called "non-performing loans." The IMF said earlier this year that the loan clean-up had largely been a success.
Japanas withstood the recent rise in oil prices better than some of its competitors, because it buys most of its oil from the Gulf states, where prices have been as much as US$10 a barrel lower than the West Texas crude bought by the US.
Nobuyuki Saji, chief economist at Mizuho Bank, says the best reason for believing this recovery will be more resilient than the many false starts over recent years is that Japanese consumers are finally beginning to abandon their caution and venture back to the shops.
"I am very confident in the recovery, and I think it's a new type of recovery, led by domestic demand," Saji said.
In the 40 to 49 age group, in particular, he says the tendency to spend has increased, and incomes have risen, despite this being a so-called "wageless recovery" for many workers.
But the latest official figures show the scale of the problems ahead. The economy just escaped recession in the third quarter of this year by scraping growth of 0.1 percent after shrinking by 0.1 percent in the second quarter.
Saji believes this is simply a "pause," driven by a slowdown in the global electronics industry.
But over the next few months it will be Japanese consumers' response to the shifting economic environment that determines whe-ther this proves to be yet another false start.
If the optimism that is evident in Japan's boardrooms filters down to the homes of ordinary Japanese, it should become self- fulfilling.
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